7-8

• Accounting Cycle


  The steps or accounting procedures normally used by entities to record transactions and prepare financial statements
• Steps in the Accounting Cycle

  1. Identifying and analyzing transactions

  2. Journalizing

  3. Posting

  4. Preparing the unadjusted trial balance

  5. Preparing the adjusting entries

  6. Preparing the adjusted trial balance

  7. Preparing the financial statements

  8. Closing the books

  9. Preparing the post-closing trial balance

  10. Preparing the reversing entries
• Double-Entry System


  Each transaction is recorded in two parts - debit and credit. The double-entry system makes use of the concepts of duality and equilibrium.
• Duality


  Each transaction has a two-fold effect on values - a value received and a value parted with, and each transaction is recorded using at least two accounts
• Equilibrium


  Each transaction must be recorded in terms of equal debits and credits
• Journal


  Book of original entry
• General Journal


  Used to record transactions other than those that are recorded in the special journals
• Special Journal


  Used to record transactions of a similar nature
• Ledger


  Book of final entry
• Account


  A systematic compilation of a group of accounts
• General Ledger


  Contains all accounts appearing in the financial statements
• Subsidiary Ledger


  Supporting ledger for controlling accounts in the general ledger
• 1. Account


  The format used for accounts in the ledger
• Chart of Accounts


  List of all the accounts used by the entity
• Types of Accounts


  • Real accounts
  • Nominal accounts
  • Mixed accounts
  • Contra accounts
  • Adjunct accounts
• Trial Balance


  A list of general ledger accounts and their balances, prepared to check the equality of total debits and total credits in the ledger
• Adjusting Entries


  Entries made prior to the preparation of financial statements to update certain accounts so that they reflect correct balances as of the designated time
• Components of a Complete Set of Financial Statements

  • Statement of financial position
  • Statement of profit or loss and other comprehensive income
  • Statement of changes in equity
  • Statement of cash flows
  • Notes
  • Comparative Information
  • Additional statement of financial position
• Liability Method


  Advanced collections of income are initially credited to a liability account; at the end of the reporting period, the earned portion is recognized as income while the unearned portion remains a liability
• Income Method


  Advanced collections of income are initially credited to an income account; at the end of the period, the unearned portion is recognized as liability while the earned portion remains an income
• Asset Method


  Prepayments of expenses are initially debited to an asset account; at the end of the period, the incurred portion is recognized as expense while the unused portion remains as asset
• Expense Method


  Prepayments of expenses are initially debited to an expense account; at the end of the period, the unused portion is recognized as asset while the incurred portion remains as expense
• Closing Entries


  Entries prepared at the end of the accounting period to "zero out" all temporary or nominal accounts in the ledger
• Post-Closing Trial Balance


  Prepared in order to prove the equality of debits and credits in the ledger after the closing process
• Reversing Entries


  Entries that may be made on all accruals, prepayments initially recorded using the expense method, and unearned income initially recorded using the income method